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April 10, 2012

Most Advisors Want Independence, but Few Make Jump, Survey Says

Short-term financial goals keep many advisors in their traditional channels, according to recruiter Mindy Diamond

A survey of some 2,500 traditional employee advisors found that more than 70% are considering a move to independence, Diamond Consultants, a recruiting and consulting firm, said Tuesday. Still, experts say, just 10% at most will actually make the move.

"Financial advisors are becoming increasingly attuned to the growing number of high-quality independent practice models,” explained Diamond Consultants president and CEO Mindy Diamond (left), in an interview with AdvisorOne.

That said, Diamond explained, many of the 70% will not go independent “when they really see what it is about and what it is not about: It is not about upfront money, big upfront money, and there’s no cachet of a big brand-name firm.”

According to the study, conducted by Diamond Consultants in the first quarter, advisors want to have greater control over their businesses and the ability to be a buy-side advocate for clients. In addition, advisors are seeking less bureaucracy, a more client-focused culture, greater freedom and flexibility, and the desire to build equity in an enterprise.

"There are now options for advisors who want to go independent through a custodian, plug into an existing independent, use a platform firm for a turnkey solution, or almost anything in between," Diamond said. "The possibilities are extensive and exciting."

Diamond Consultants has placed four teams with a combined $2.5 billion in client assets with independent firms so far this year.

“The quality of the advisors and teams going independent today is far greater than that of the past,” the recruiter said. “The quality is way up in terms of the size of the books of business, which is about $500 million to $1 billion in assets typically and $3 million to $4 million in revenue.”

As more teams make the jump to independence, their stories “help others realize that they too can make this leap and enjoy the freedom to design and grow their practices their way,” said Rajini Kodialam of Focus Financial Partners, a nearly $50 billion aggregator of RIA firms, in a statement. “In fact, Lori VanDusen's recent move here, to form LVW Advisors, is a great example of an industry luminary who made the change and couldn't be more pleased with the outcome.”

Still, the decision is a tough one for traditional brokers, Diamond admits, mainly because of the short-term financial concerns. First, the advisors don’t get the upfront bonuses—which can be as much as 200%of their trailing-12-month fees and commissions—associated with moving to another wirehouse. And, second, they may have to walk away from some deferred compensation, unamortized retention packages and other perks.

“I’m working with a super-entrepreneurial Merrill Lynch team that is committed to moving to independence,” Diamond said. “They were offered 200% cash up front by another wirehouse, which is, they’ve said, the last move they’d want to make. I don’t know the answer yet, but I bet they take it.”

Independence, she explains, is a long-term proposition that tends to happen when an advisor finds the “perfect timing.” Otherwise, advisors look at all the details, Diamond says, and decide “they’re not as entrepreneurial as they once thought.”